Chromatin insulators organize the genome into distinct transcriptional domains and contribute to cell type-specific chromatin organization. However, factors regulating tissue-specific insulator function have not yet been discovered. We identified the RNA recognition motif-containing protein, Shep, as a direct interactor of two individual components of the gypsy insulator complex in Drosophila. Mutation of shep improves gypsy-dependent enhancer blocking, indicating a role as a negative regulator of insulator activity. Unlike ubiquitously expressed core gypsy insulator proteins, Shep is highly expressed in the central nervous system (CNS) with lower expression in other tissues. We developed a novel, quantitative tissue-specific barrier assay to demonstrate that Shep functions as a negative regulator of insulator activity in the CNS but not in muscle tissue. Additionally, mutation of shep alters insulator complex nuclear localization in the CNS but not other tissues. Consistent with negative regulatory activity, ChIP-seq analysis of Shep in a CNS-derived cell line indicates substantial genome-wide colocalization with a single gypsy insulator component but limited overlap with intact insulator complexes. Taken together, these data reveal a novel, tissue-specific mode of regulation of a chromatin insulator.